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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-22162
CARECENTRIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3209241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2625 CUMBERLAND PARKWAY, SUITE 310 30339
ATLANTA, GEORGIA (zip code)
(Address of principal
executive offices)
(Registrant's telephone number,
including area code) (678) 264-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding at
Class 4/30/2001
----- --------------
COMMON STOCK, $.001 PAR VALUE 4,443,504 SHARES
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CARECENTRIC, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2001 (unaudited) and
December 31, 2000 (audited).
Consolidated Statements of Operations - Three Months Ended
March 31, 2001 (unaudited) and 2000 (audited).
Consolidated Statements of Shareholders' Equity - Three
Months Ended March 31, 2001 (unaudited).
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2001 (unaudited) and 2000 (audited).
Notes to Consolidated Financial Statements - March 31, 2001
(unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by CareCentric, Inc. ("CareCentric" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of the Company, all adjustments (consisting only of normal recurring entries)
necessary for the fair presentation of the Company's results of operations,
financial position and cash flows for the periods presented have been included.
3
CARECENTRIC, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
---------- -----------
2001 2000
---------- -----------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 254,000 $ 362,000
Accounts receivable, net of allowance for doubtful
accounts of $525,000 and $237,000 respectively 9,404,000 8,484,000
Prepaid expenses, inventory and other current assets 1,109,000 701,000
------------ --------------
Total current assets 10,767,000 9,547,000
Purchased software, furniture and equipment, net 1,908,000 1,957,000
Intangible assets, net 22,488,000 23,405,000
Other assets 204,000 211,000
------------ --------------
Total assets $ 35,367,000 $ 35,120,000
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,996,000 $ 5,996,000
Note payable 630,000 600,000
Accounts payable 2,838,000 1,156,000
Accrued compensation expense 1,013,000 616,000
Accrued liabilities 6,968,000 7,447,000
Customer deposits 2,400,000 2,496,000
Unearned revenues 4,437,000 5,001,000
------------ -------------
Total current liabilities 24,282,000 23,312,000
Accrued liabilities, less current portion 36,000 128,000
Notes payable long-term 2,300,000 600,000
------------ ------------
Total liabilities 26,618,000 24,040,000
Shareholders' equity:
Preferred stock ; 10,000,000 shares authorized
Series B Preferred, $.001 par value; 5,600,000 issued and outstanding 6,000 6,000
Series C Preferred, $.001 par value; 850,000 issued and outstanding 1,000 1,000
Series D Preferred, $.001 par value; 398,000 issued and outstanding - -
Common stock, $.001 par value; 20,000,000 shares authorized,
4,443,504 shares issued and outstanding at March 31, 2001, and
3,849,816 shares issued and outstanding at December 31, 2000; 4,000 4,000
Additional paid-in capital 21,070,000 21,070,000
Stock warrants 1,000,000 1,000,000
Accumulated deficit (13,332,000) (11,001,000)
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Total shareholders' equity 8,749,000 11,080,000
------------- -------------
Total liabilities and shareholders' equity $ 35,367,000 $ 35,120,000
============= ============
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired CareCentric, Inc. on March 7, 2000, the
date of the merger, as more fully explained in Notes 1 and 2 to the Consolidated
Financial Statements.
4
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------------------
2001 2000
------------------- -------------------
Net revenues: $ 6,844,000 $ 4,000,000
Costs and expenses:
Cost of revenues 3,268,000 2,547,000
Selling, general and administrative 2,825,000 1,453,000
Research and development 1,767,000 711,000
Depreciation and amortization 1,085,000 426,000
------------------- -------------------
Total costs and expenses 8,945,000 5,137,000
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Loss from operations (2,101,000) (1,137,000)
Other (expense) income:
Interest expense (356,000) (76,000)
Interest and other income 126,000 6,000
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Net loss before taxes (2,331,000) (1,207,000)
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Income tax benefit - (157,000)
------------------- -------------------
Net loss $ (2,331,000) $ (1,050,000)
=================== ===================
Net loss per share - basic and diluted $ (0.59) $ (0.50)
=================== ===================
Weighted average common shares -
basic and diluted 3,922,000 2,093,000
=================== ===================
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired CareCentric, Inc. on March 7, 2000, the
date of the merger, as more fully explained in Notes 1 and 2 to the Consolidated
Financial Statements. The weighted average shares computations have been recast
to give effect to the shares of CareCentric common stock issued to MCS
stockholders in connection with the MCS merger for both periods shown, as more
fully described in Note 1 to the Consolidated Financial Statements.
5
CARECENTRIC, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
TOTAL
COMMON PREFERRED PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL WARRANTS DEFICIT EQUITY
----------- ----------- ----------- ----------- ------------- ------------ ------------- -------------
Balance at
December 31, 2000 3,850,000 $ 4,000 6,848,000 $ 7,000 $21,070,000 $ 1,000,000 $(11,001,000) $11,080,000
Issuance of
$.001 par value
common stock (1) 594,000 - - - - - - -
Net loss - - - - - - (2,331,000) (2,331,000)
---------- -------- ---------- --------- ------------ ----------- -------------- -----------
Balance at
March 31, 2001 4,444,000 $ 4,000 6,848,000 $ 7,000 $21,070,000 $1,000,000 $(13,332,000) 8,749,000
=========== ======== ========== ========= ============ =========== ============= ===========
(1) See Note 7 to the consolidated financial statements.
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired CareCentric, Inc. on March 7, 2000, the
date of the merger, as more fully explained in Notes 1 and 2 to the Consolidated
Financial Statements.
6
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2001 2000
-------------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,331,000) $ (1,050,000)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Provision for doubtful accounts 43,000 71,000
Amortization and depreciation 1,085,000 426,000
CHANGES IN ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable (920,000) (1,364,000)
Prepaid expenses and other current assets (401,000) (182,000)
Accounts payable 1,223,000 172,000
Accrued compensation expense 397,000 225,000
Accrued liabilities (112,000) (830,000)
Customer deposits (96,000) 105,000
Unearned revenues (564,000) 1,015,000
-------------------- ------------------
Net cash used in operating activities (1,676,000) (1,412,000)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of software, furniture and equipment (119,000) (161,000)
-------------------- ------------------
Net cash used in investing activities (119,000) (161,000)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in connection with MCS merger - 3,547,000
Proceeds from issuance of notes payable 1,700,000 7,000
Payments on capital lease obligations (13,000) -
-------------------- ------------------
Net cash provided by financing activities 1,687,000 3,554,000
-------------------- ------------------
Net increase/(decrease) in cash and cash equivalents (108,000) 1,981,000
Cash and cash equivalents, beginning of period 362,000 47,000
-------------------- ------------------
Cash and cash equivalents, end of period $ 254,000 $ 2,028,000
==================== ==================
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired CareCentric, Inc. on March 7, 2000, the
date of the merger, as more fully explained in Notes 1 and 2 to the Consolidated
Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCS as Deemed Acquirer of CareCentric, Inc.
-------------------------------------------
On March 7, 2000, CareCentric, Inc. (formerly known as Simione Central
Holdings Inc.) ("CareCentric" or the "Company") and MCS, Inc. ("MCS") merged in
a transaction accounted for as a reverse acquisition for financial reporting
purposes. In connection with the acquisition, CareCentric issued 1,489,853
shares of its common stock in exchange for all the outstanding common stock of
MCS, and thereby, the former shareholders of MCS acquired control of
CareCentric. As a result, for financial reporting purposes MCS is considered the
acquiring company; hence, the historical financial statements of MCS became the
historical financial statements of CareCentric and include the results of
operations of CareCentric only from the effective acquisition date.
The weighted average common shares for the three months ended March 31,
2000 are recast in the accompanying Consolidated Statements of Operations to
give effect to the 1,489,853 shares of CareCentric common stock that were issued
to the MCS shareholders in connection with the CareCentric/MCS merger on March
7, 2000 as though such shares had been outstanding for the entire period. For
the period from January 1, 2000 through March 6, 2000, therefore, 1,489,853
shares of issued and outstanding CareCentric common stock are deemed to be owned
by the MCS shareholders. For the period from March 7, 2000 through December 31,
2000, there were 3,849,816 total shares of issued and outstanding Company common
stock (after giving effect to the CareCentric/MCS merger). The weighted average
shares for the year ended December 31, 2000 are also recast to give effect to
the 1,489,853 shares of CareCentric common stock that were issued to the MCS
shareholders pursuant to the CareCentric/MCS merger as though such shares had
been outstanding for the entire period.
Basis of Presentation
---------------------
The consolidated financial statements have been prepared by the Company
(which as used herein refers to CareCentric, after giving effect to the merger
with MCS and, as the context requires, MCS, prior to the CareCentric/MCS
merger), include the results of operations of the parent company and its wholly
owned subsidiaries and are unaudited (except for the December 31, 2000 balance
sheet). In the opinion of management, all adjustments, which consist of normal
recurring adjustments, considered necessary for a fair presentation have been
included. All inter-company balances and transactions have been eliminated.
Interim results are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
as of December 31, 2000 appearing in the Company's Report on Form 10-K for the
year ended December 31, 2000.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and amounts and
classification of liabilities that might be necessary should the Company be
unable to continue to operate in the normal course of business. See the
Liquidity and Capital Resources section of Management's Discussion and Analysis
of Financial Condition and Results of Operations herein.
Certain prior period amounts have been reclassified to conform to the 2001
financial statement presentation.
Description of Business
-----------------------
The Company is a leading provider of information technology systems and
related services and consulting services designed to help home health care
providers more effectively operate their businesses in today's environment. The
Company's focus is to help home health care providers streamline their
operations and better serve their patients. The Company offers several
comprehensive software solutions. Each of these solutions provides a basic set
8
of software applications and specialized modules that can be added based upon
customer needs. These software solutions are designed to enable customers to
generate and utilize comprehensive financial, operational and clinical
information. In addition to its software solutions and related software support
services, the Company's home health care consulting services assist providers in
addressing the challenges of reducing costs, maintaining quality, streamlining
operations and re-engineering organizational structures, as well as assisting
with regulatory compliance and merger and acquisition due diligence.
Cash Equivalents
----------------
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Intangible Assets and Long-Lived Assets
---------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of" requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount.
The intangible assets arising from the CareCentric/MCS merger are amortized
using the straight-line method over the estimated useful lives of the related
assets as more fully disclosed in Note 4. The Company reviews its long-lived and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The measurement of
possible impairment is based upon determining whether projected undiscounted
future cash flow from the use of the asset is less than the carrying amount of
the asset.
Income Taxes
------------
The Company accounts for income taxes using the asset/liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities.
Net (Loss) Earnings Per Share
-----------------------------
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share for the quarters ended March
31, 2000 and 2001 exclude the effects of options, warrants and conversion rights
as they would be antidilutive, and as a result, basic and diluted earnings are
the same for the quarters ended March 31, 2000 and 2001. Per share amounts for
all periods have been presented in conformity with SFAS No. 128 requirements.
Stock Based Compensation
------------------------
Stock options are accounted for under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS No. 123 and related interpretations).
9
Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair value.
Notes payable: The carrying amounts of the Company's notes payable
approximates their fair value.
Recently Adopted Accounting Standards
-------------------------------------
In 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
became effective for the Company's fiscal quarter ended March 31, 2001. The
Company's management does not believe that the adoption of SFAS No. 133 will
have a material impact on the Company's financial position or results of
operations.
On December 3, 1999, the SEC released Staff Accounting Bulletin 101, (SAB
101) "Revenue Recognition in Financial Statements". This bulletin established
more clearly defined revenue recognition criteria than previously existing
accounting pronouncements. On June 26, 2000, the SEC released SAB 101B, which
delayed the required implementation of SAB 101 until no later than the fourth
quarter of fiscal years ending December 31, 2000. The Company believes that the
effects of this bulletin were not material to its financial position, results of
operations or cash flow.
NOTE 2 - CARECENTRIC/MCS MERGER
On March 7, 2000, MCS completed the merger with CareCentric. CareCentric
issued 1,489,853 shares of common stock to MCS stockholders in exchange for all
of the outstanding shares of MCS common stock. This number of shares has been
adjusted to reflect a one-for-five reverse stock split that was completed by
CareCentric immediately prior to the merger. In connection with the closing of
the merger, Mestek invested $6.0 million in CareCentric in exchange for 5.6
million shares of Series B preferred stock and warrants to purchase 400,000
shares (on a split adjusted basis) of CareCentric common stock. Additional
information on the merger is included in the Company's Registration Statement on
Form S-4 (Registration No. 333-96529).
As required by generally accepted accounting principles (GAAP), the effects
of the merger on the Company's assets and liabilities have been excluded from
the operating section of the cash flow statement for reporting purposes.
Pro-forma unaudited results assuming the merger took place as of January 1,
2000 are as follows:
FOR THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2001 2000
---------------------- ---------------------
Net revenues $ 6,844,000 $ 8,011,000
Net (loss) $ (2,331,000) $ (2,445,000)
Net (loss) per share - basic $ (0.59) $ (0.63)
Net (loss) per share - diluted $ (0.59) $ (0.63)
10
NOTE 3 - PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment consisted of the following:
DEPRECIATION
MARCH 31, DECEMBER 31, ESTIMATED
2001 2000 USEFUL LIVES
---------------- ----------------- ------------------
Software $ 1,633,000 $ 1,635,000 3 years
Furniture and fixtures 1,553,000 1,551,000 10 years
Computer equipment 4,534,000 4,415,000 5 years
------------------ ------------------
7,720,000 7,601,000
Accumulated depreciation (5,812,000) (5,644,000)
------------------ ------------------
Net purchased software, furniture
and equipment $ 1,908,000 $ 1,957,000
================== ==================
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2001 consisted of the following:
ACCUMULATED NET BOOK AMORTIZATION
COST AMORTIZATION VALUE PERIOD
----------------- -------------------- ---------------- ----------------
Developed technology $10,650,000 $ (1,442,000) $ 9,208,000 8 years
Assembled workforce 2,300,000 (498,000) 1,802,000 5 years
Customer base 1,700,000 (204,000) 1,496,000 9 years
Goodwill 11,851,000 (1,869,000) 9,982,000 7 years
----------------- -------------------- ----------------
$26,501,000 $ (4,013,000) $ 22,488,000
================= ==================== ================
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
March 31, 2001 December 31, 2000
-------------- -----------------
SHORT TERM:
Line of Credit $ 5,996,000 $ 5,996,000
Note Payable - Mestek $ 600,000 $ 600,000
============ ============
LONG TERM:
Convertible Note Payable - Barrett C. O'Donnell $ 600,000 $ 600,000
Convertible Note Payable - J.E Reed $ 1,700,000 $ -
============ =============
Line of Credit:
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility (the Wainwright Facility) with Wainwright Bank and Trust
Company, a commercial bank, under which the Company granted a first priority
position on substantially all of its assets as security. The Wainwright Facility
was initially used to pay off the line of credit with Silicon Valley Bank,
certain short-term loans from Mestek, Inc., and a loan from David O. Ellis, and
then to fund the Company's operations. Borrowings under the Wainwright Facility
accrue interest, at the bank's prime rate per annum, require monthly payments of
interest and mature on July 12, 2001. The
11
Company expects that line of credit will be renewed at maturity under
substantially equivalent terms. The Company's obligations under the Wainwright
Facility are guaranteed by Mestek in consideration of which the Company has
issued a warrant to Mestek to purchase 104,712 shares of the Company's common
stock as more fully explained in Note 7 to these Financial Statements.
Convertible Note Payable - Barrett C. O'Donnell:
On November 11, 1999, Simione borrowed $500,000 from Barrett C. O'Donnell
on an unsecured basis and executed a promissory note in connection therewith.
Mr. O'Donnell is a director of the Company. When the CareCentric/MCS merger was
completed on March 7, 2000, the Company succeeded to this obligation. The note
payable to Mr. O'Donnell included interest at 9% per annum, was scheduled to
mature on May 11, 2002, and required quarterly payments of accrued interest. On
August 8, 2000, the $500,000 note payable to Mr. O'Donnell, together with
$100,000 of deferred salary, was cancelled in exchange for a $600,000
subordinated note, convertible into CareCentric common stock at a strike price
of $2.51 per share, with interest at 9% per annum and a five-year maturity.
Note Payable - Mestek:
The Company is obligated under a one year unsecured promissory note in the
principal amount of $600,000 payable to Mestek Inc. which bears interest at
prime with interest payable semiannually and which matures on July 30, 2001.
This note covers funds advanced by Mestek to CareCentric to cover payroll and
accounts payable obligations incurred by the Company during the period of its
transition of senior lenders from Silicon Valley Bank to Wainwright Bank and
Trust Company.
J.E. Reed Facility:
On June 22, 2000, the Company entered into a new financing facility (the J.
E. Reed Facility) provided by John E. Reed, Chairman of CareCentric and the
Chairman and Chief Executive Officer of Mestek, Inc. The J. E. Reed Facility
consists of a $6.0 million subordinated revolving line of credit, convertible
into common stock of the Company at a strike price of $2.51 per share, with
interest at 9% per annum and a five-year maturity. The J. E. Reed Facility can
be drawn down by the Company as needed in $500,000 increments and is secured by
a second position on substantially all of the Company's assets. Borrowings
totaling $2.2 million were outstanding under the J. E. Reed Facility as of May
11, 2001.
The Company is obligated under a number of capital lease obligations
originally entered into by CareCentric related to computer equipment formerly
used in CareCentric's business.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal and regulatory proceedings arising
in the normal course of business which management believes will not have a
material adverse effect on its financial position or results of operations.
NOTE 7 - SHAREHOLDERS' EQUITY
Subsequent to December 31, 2000, the Company's Shareholders' Equity (all on
a split-adjusted basis) is as follows:
Common Shares - 20,000,000 shares authorized, $.001 par value, 4,443,504
shares issued and outstanding. Of such shares, 1,489,853 were issued on March 7,
2000 to the former MCS common shareholders, 606,904 were issued on March 7, 2000
to the holders of CareCentric Series A Preferred Stock (the former preferred
12
shareholders and noteholders of CareCentric Solutions, Inc.), which shares were
converted into CareCentric common shares in connection with the merger, and
593,688 were issued on March 19, 2001 to the former preferred shareholders and
noteholders of CareCentric Solutions, Inc. as described below.
Pursuant to the terms of the July 12, 1999 Merger Agreement by which
Simione acquired the stock of CareCentric Solutions, Inc., the Company was
required to issue up to an additional 606,904 shares of common stock to the
former preferred shareholders and noteholders of CareCentric Solutions if the
average closing price of the Company's stock for the period October 1, 2000
through December 31, 2000 is not equal to $15.00 per share. Since the Company's
average closing stock price for the fourth quarter of 2000 was less than $15.00
per share, on March 19, 2001, the Company issued 593,688 shares of its common
stock to the former preferred shareholders and noteholders of CareCentric
Solutions. The Company has asserted that it is not required to issue 13,216
additional shares of its common stock as well as 150,740 shares of common stock
currently being held by it in escrow under the terms of the CareCentric
Solutions Merger Agreement based upon various indemnification and expense
overages claims it believes it has against the former CareCentric Solutions
preferred shareholders and noteholders. The Company has negotiated a settlement
of these claims with the representative of the former CareCentric Solutions
parties pursuant to which 88,586 shares of common stock will be released from
escrow and distributed to the former CareCentric Solutions preferred
shareholders and noteholders, the remaining 62,154 escrow shares will be
cancelled, no additional shares of common stock will be issued, and the parties
will execute a comprehensive settlement agreement.
Stock Options - The Company has granted options to purchase an aggregate of
698,819 shares (on a split adjusted basis) of common stock as of March 31, 2001.
Of the options granted, none were exercised prior to March 31, 2000 and 117,593
have been cancelled. Of the remaining 581,226 options, 243,426 are vested and
exercisable as of March 31, 2001. The exercise prices range from $2.51 to $73.55
per share, both on a split adjusted basis.
On January 5, 2001, non-qualified options totaling 25,000 shares were
granted under the Plan to the non-employee directors at an exercise price of
$3.25 per share.
NOTE 8 - SEGMENT RESULTS
The Company has two reportable segments: Software Systems and Consulting.
The Company's Software Systems segment sells comprehensive and flexible software
solutions and services to enable home health care providers to more effectively
operate their businesses and compete in prospective payment (PPS) and managed
care environments. The Consulting segment assists home health care providers in
addressing the challenges of reducing costs, maintaining quality, streamlining
operations and re-engineering organizational structures, as well as assisting
with regulatory compliance and assisting with merger and acquisition due
diligence.
The Company evaluates performance and allocates resources based on profit
or loss from operations, not including gains and losses on the Company's
investment portfolio. The accounting policies of the reportable segments are the
same as those used for the Consolidated Financial Statements. The revenues,
operating (losses) profits and assets of the Company include the operations of
MCS only from January 1, 2000 through March 7, 2000 and CareCentric from March
7, 2000 forward. Accordingly, because CareCentric's 2000 results from operations
are not fully included, comparability between the 2000 and 2001 figures is not
meaningful. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of revenue and results of operations on a
"comparable" basis. The revenues, operating losses and assets of the Company by
business segment are as follows:
13
Three Months ended March 31,
-----------------------------------
2001 2000
--------------- ---------------
Revenues:
Software Systems $ 5,685,000 $ 3,564,000
Consulting 1,159,000 436,000
--------------- ----------------
Total $ 6,844,000 $ 4,000,000
=============== ================
Cost of sales:
Software Systems $ 2,488,000 $ 2,122,000
Consulting 780,000 425,000
--------------- ----------------
Total 3,268,000 $ 2,547,000
=============== ================
Research and development:
Software Systems $ 1,767,000 $ 711,000
=============== ================
Depreciation and amortization:
Software Systems $ 957,000 $ 389,000
Consulting 128,000 37,000
--------------- ----------------
Total $ 1,085,000 $ 426,000
=============== ================
Net income (loss) from Continuing
Operations:
Software Systems $ (2,156,000) $ (1,177,000)
Consulting 55,000 40,000
---------------- ---------------
Total (2,101,000) $ (1,137,000)
================ ===============
Interest expense
Software Systems $ 356,000 $ 76,000
---------------- ---------------
Total $ 356,000 $ 76,000
================ ===============
Income taxes
Software Systems $ - $ (157,000)
---------------- ---------------
Total $ - $ (157,000)
================ ===============
Expenditures for long-lived Assets
Software Systems $ 119,000 $ 161,000
---------------- ---------------
Total $ 119,000 $ 161,000
================ ===============
March 31, December 31,
----------------------------------------
2001 2000
------------------ -----------------
Assets
Software Systems $ 30,865,000 $30,648,000
Consulting $ 4,502,000 $ 4,472,000
------------------- ----------------
Total $ 35,367,000 $35,120,000
=================== ================
Certain categories of expenses are omitted. See Consolidated Financial
Statements above.
The Net Income (loss) from continuing operations reported above has been
affected by non-cash depreciation and amortization charges as reported above.
14
NOTE 9 - LICENSE AGREEMENTS
The Company licenses certain software products from third parties for
incorporation in, or other use with, its products and is obligated to pay
license fees in connection with such products. The Company sublicenses such
products to its customers and collects fees in connection with such
sublicensees.
NOTE 10 - SUBSEQUENT EVENTS
On January 31, 2001, the Company changed its name from Simione Central
Holdings, Inc. to CareCentric, Inc. pursuant to a Certificate of Ownership and
Merger filed under applicable provisions of the Delaware General Corporation
Law. On the same date, the Company's two operating subsidiaries also changed
their names, with Simione Central Consulting, Inc. changing its name to Simione
Consulting, Inc. and Simione Central National, LLC changing its name to
CareCentric National, LLC pursuant to filings made with the Georgia Secretary of
State's office.
On March 19, 2001, the Company issued 593,688 shares of its common stock to
the former preferred shareholders and noteholders of CareCentric Solutions
pursuant to the terms of the July 12, 1999 Merger Agreement as more fully
explained in Note 7 to these Financial Statements.
In the second quarter of 2001 the Company recorded restructuring charges of
approximately $675,000 relating primarily to initiatives to reduce future
operating costs by focusing the software operations into two core markets - Home
Medical Equipment - IV and Home Health Agency. Principal costs included in the
charge were (i) severance and related benefits for the elimination of 33
positions and the layoff of six employees, and (ii) the costs of closing one
non-essential training and support location.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended, and are
subject to the safe harbor created by such sections. When used in this report,
the words "believe", "anticipate", "estimate", "expect", and similar expressions
are intended to identify forward-looking statements. The Company's future
financial performance could differ significantly from that set forth herein, and
from the expectations of management. Important factors that could cause the
Company's financial performance to differ materially from past results and from
those expressed in any forward looking statements include, without limitation,
the inability to close the transactions required to obtain the additional
capital resources described herein, variability in quarterly operating results,
customer concentration, product acceptance, long sales cycles, long and varying
delivery cycles, the Company's dependence on business partners, emerging
technological standards ,the effects of changes in regulations affecting health
care providers, uncertainties regarding the restructuring described herein,
risks associated with acquisitions and the risk factors detailed in the
Company's Registration Statement on Form S-4 (File No. 333-96529) and in the
Company's periodic reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. This Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto.
Liquidity and Capital Resources
-------------------------------
The Company secured $13.0 million in new debt and equity capital during
2000 as follows:
SOURCE FUNDING FORM DATE CLOSED
------------------------------------ ------------------ ------------------------ ----------------------
John E. Reed $ 1,000,000 Series D Preferred Stock June 22, 2000
John E. Reed 6,000,000 Line of Credit June 22, 2000
Wainwright Bank and Trust Company 6,000,000 Line of Credit July 12, 2000
------------------
$ 13,000,000
==================
Details on these three transactions are described in greater detail in
Note 5 to the accompanying Financial Statements.
The Wainwright Bank and Trust Company Line of Credit was used to pay off
the Silicon Valley Bank Line of Credit, certain short term loans from Mestek
Inc., and the note payable to David O. Ellis. As of May 11, 2001, the unused
capacity under the John E. Reed and Wainwright Bank and Trust Company lines of
credit are $3,800,000 and $0, respectively.
Notwithstanding the Company's continued commitment to research and
development, its net borrowings from all sources, representing in effect the
Company's "cash run rate", were significantly reduced during the three months
ended March 31, 2001, to $1,700,000, as compared with the three months ended
December 31, 2000, during which the Company borrowed $2,697,000. The Company's
borrowings from all sources between April 1, 2001 and May 11, 2001 were
$500,000, with $3,800,000 in available capacity remaining under the J.E. Reed
line of credit as of that date. As disclosed in the financial statements, the
Company has a working capital deficit of $13,515,000 at March 31, 2001.
In furtherance of the Company's plan to achieve a breakeven cash run rate
in the near term, it implemented a restructuring plan in April 2001, as more
fully described herein, in addition to the various other ongoing cost reduction
initiatives undertaken subsequent to the MCS/CareCentric merger on March 7,
2000. The Company believes in light of these cost reduction efforts that its
funding sources, as described above, will be sufficient to meet its working
capital needs in 2001. The Company remains dependent, however, on its majority
shareholder, J. E. Reed, for its working capital financing needs.
16
As part of the restructuring plan, the Company will record a restructuring
charge of approximately $675,000 to cover the cost of employee severance and
related benefits for the elimination of 33 positions, the layoff of six
employees, and the closing of one non-essential training and support facility.
Total annual payroll and associated benefits for the affected employees are
approximately $3.8 million and total annual operating costs for the closed
facility are approximately $55,000.
The Company's operating earnings for the three months ended March 31, 2001,
after adding back non cash charges (amortization and depreciation) and spending
on research and development, was $751,000, computed as follows:
(Loss) Income from operations $ (2,101,000)
Amortization and depreciation 1,085,000
Research and development 1,767,000
--------------------
$ 751,000
====================
Background
----------
CareCentric, Inc. (formerly known as Simione Central Holdings, Inc.)
("CareCentric" or the "Company") is a leading provider of information technology
systems and related software support services and consulting services designed
to help home health care providers more effectively operate their businesses in
today's environment. The Company's focus is to help home health care providers
streamline their operations and better serve their patients. CareCentric offers
several comprehensive software solutions. Each of these solutions provides a
basic set of software applications and specialized modules, which can be added
based on customer needs. These software solutions are designed to enable
customers to generate and utilize comprehensive financial, operational and
clinical information. In addition to its software solutions and related software
support services, the Company's home health care consulting services assist
providers in addressing the challenges of reducing costs, maintaining quality,
streamlining operations and re-engineering organizational structures, as well as
assisting with regulatory compliance and merger and acquisition due diligence.
The Company sells its software pursuant to non-exclusive license
agreements, which provide for the payment of a one-time license fee. In
accordance with SOP 97-2, these revenues are recognized when products are
delivered and the collectibility of fees is probable, provided that no
significant obligations remain under the contract. The Company generally
requires payment of a deposit upon the signing of a customer order as well as
certain additional payments prior to delivery. As a result, the Company's
balance sheet reflects significant customer deposits.
Third party software and computer hardware revenues are recognized when the
related products are shipped. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company charges for software implementation, training and
technical consulting services as well as management consulting services on an
hourly or daily basis. The price of such services varies depending on the level
and expertise of the related professionals. These revenues are recognized as the
related services are performed.
The Company believes that continued enhancement of its software systems is
critical to its future success, and anticipates that investment in existing and
new products will continue as needed to support the Company's product
strategies. Costs incurred to establish the technological feasibility of
computer software products are expensed as incurred. The Company's policy is to
capitalize costs incurred between the point of establishing technological
feasibility and general release only when such costs are material. For the three
months ended March 31, 2001 and 2000, the Company did not capitalize any
computer software development costs.
17
Backlog
-------
The Company had backlog associated with its software operations of
approximately $3.7 million and $4.1 million on March 31, 2001 and December 31,
2000, respectively. Backlog consists of the unrecognized portion of
contractually committed software license fees, hardware, estimated installation
fees and professional services. The length of time required to complete an
implementation depends on many factors outside the control of the Company,
including the state of the customer's existing information systems and the
customer's ability to commit the personnel and other resources necessary to
complete the implementation process. As a result, the Company may be unable to
predict accurately the amount of revenue it will recognize in any period and
therefore can make no assurances that the amounts in backlog will be recognized
in the next twelve months.
During the first quarter of 2001 CareCentric recorded new orders for
software and related services of $2.1 million, a decrease of $0.5 million, or
19.0%, from the $2.6 million recorded in the first quarter of 2000.
Results of Operations
---------------------
Results of operation for the three months ended March 31, 2000 included the
operations of the former MCS for three months and the operations of CareCentric
(formerly Simione Central Holdings, Inc.) for only the period subsequent to
March 7, 2000. As a result, a comparison of the 2001 and 2000 Statements of
Operations is not meaningful to an understanding of the Company's relative
performance. Therefore, for purposes of comparability, the following discussion
reflects the assumption that the operations of CareCentric and MCS were combined
on a pro-forma basis for the three months ended March 31, 2000, as illustrated
in Table 1 below.
Net Revenues. Total net revenues for the three months ended March 31, 2001
decreased by $1.2 million, or 15.0%, to $6.8 million in 2001 from $8.0 million
in 2000. Revenues from software systems decreased by $0.4 million, or 13.3%, to
$2.6 million in 2001 from $3.0 million in 2000.. Revenues from software
maintenance decreased by $0.3 million, or 9.1%, to $3.0 million in 2001 from
$3.3 million in 2000. Revenue from consulting services decreased by $0.5
million, or 29.4%, to $1.2 million in 2001 from $1.7 million in 2000.
These reduced revenues are principally attributable to reduced spending
resulting from uncertainties in the marketplace related to a new home health
care reimbursement system, the Prospective Payment System (PPS) implemented by
the Health Care Financing Administration (HCFA) in October 2000. In contrast to
the former Interim Payment System which was based upon Medicare's historic cost
reimbursement, PPS is based upon pre-set per episode fees. As such, PPS
represented a radical departure from past practice and introduced significant
uncertainty in the home health care industry.
Cost of Revenues. Total cost of revenues decreased approximately $1.5
million, or 31%, to $3.3 million for the three months ended March 31, 2001 from
$4.8 million in 2000. As a percentage of total revenues, cost of revenues
decreased to 48.1% in 2001 from 59.6% in 2000. The $1.5 million decrease
resulted from reduced total sales in 2001 as compared to 2000 and efficiencies
achieved from the combination of support operations, elimination of excess
capacity and cost management after the merger. The improvement in gross margin
percentage resulted from efficiencies achieved from the combination of support
operations and other cost management activities, as well as a reduction in
hardware revenues as a percentage of total revenues.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased $0.1 million to $2.9 million in 2001 from $3.0
million in 2000. This decrease is principally attributable to synergies derived
from centralization of administrative functions and elimination of non-essential
facilities and excess capacity totaling $0.3 million, which were partially
offset by one-time expenditures surrounding the change in corporate identity and
increased advertising and marketing costs totaling $0.2 million. As a percentage
of total net revenues, selling, general and administrative expenses were 41.6%
for the three months ended March 31, 2001 compared with 37.0% for the three
months ended March 31, 2000. The increase as a percent of revenue is primarily
attributable to the relatively fixed nature of these costs and reduced revenues.
Research and Development Expenses. Research and development expenses
increased $0.3 million, or 20.0% to $1.8 million in 2001 from 1.5 million in
2000. As a percentage of total net revenues, these expenses increased to 26.0%
for the three months ended March 31, 2001 from 18.6% for the three months ended
18
March 31, 2000. This dollar increase was attributable to additional development
costs for all products, but especially for The Smart Clipboard(R), PharmMed
Rx(TM) and HMExpress.
Amortization and Depreciation. Amortization and depreciation decreased by
$0.1 million, or 9.5% to $1.1 million in 2001 from $1.2 million in 2000. This
decrease resulted from the normal disposition of fully depreciated assets.
Other Income (Expense). Interest expense for the three months ended March
31, 2000 relates primarily to borrowings under the Company's line of credit
agreement and capital lease obligations and has increased by approximately
$177,000 as a result of increased borrowing subsequent to March 31, 2000.
Income Taxes. The Company has not incurred or paid taxes since its
inception.
TABLE 1. CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
-------------------------------------------
2001 2000
------------------- -------------------
Net revenues: $ 6,844,000 $ 8,011,000
Costs and expenses:
Cost of revenues 3,268,000 4,778,000
Selling, general and administrative 2,825,000 2,963,000
Research and development 1,767,000 1,489,000
Depreciation and amortization 1,085,000 1,198,000
------------------- -------------------
Total costs and expenses 8,945,000 10,428,000
------------------- -------------------
Loss from operations (2,101,000) (2,418,000)
Other (expense) income:
Interest expense (356,000) (178,000)
Interest and other income 126,000 (3,000)
------------------- -------------------
Net loss before taxes (2,331,000) (2,599,000)
------------------- -------------------
Income tax benefit - (154,000)
------------------- -------------------
Net loss $ (2,331,000) $ (2,445,000)
=================== ===================
Net loss per share - basic and diluted $ (0.59) $ (0.63)
=================== ===================
Weighted average common shares -
basic and diluted 3,927,000 3,927,000
=================== ===================
19
Impact of New Accounting Standards
----------------------------------
In 1998, the Financial and Accounting Standards Board issued SFAS No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for the Company's fiscal year ending
December 31, 2001. The Company's management does not believe that the adoption
of SFAS No. 133 will have a material impact on the Company's position or results
of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
As of March 31, 2001, the Company's obligations include variable rate notes
payable and a line of credit bank note with aggregate principal balances of
approximately $7.2 million, which mature at various dates through 2005. The
Company is exposed to the market risk of significant increases in future
interest rates. Each incremental point change in the prime interest rate would
correspondingly increase or decrease the Company's interest expense by
approximately $66,000 per year.
At March 31, 2001, the Company had accounts receivable of approximately
$9.4 million (net of an allowance for doubtful accounts of $525,000). The
Company is subject to a concentration of credit risk because most of the
accounts receivable are due from companies in the home health industry.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither CareCentric nor any of its subsidiaries is currently a party to any
legal proceedings which would be material to the business or financial condition
of the Company on a consolidated basis.
Item 2. Change in Securities.
On March 19, 2001, the Company issued 593,688 shares of its common stock to
the former preferred shareholders and noteholders of CareCentric Solutions, Inc.
pursuant to the terms of the July 12, 1999 Merger Agreement. In issuing the
warrants and shares without registration, the Company relied on the exemption
from registration provided in Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following Exhibits are filed as part of this Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- -----------
10.1* First Amendment to Voting Agreement Regarding Simione Directors
dated as of July 12, 2000 by and among the Company, Mestek, Inc.,
John E. Reed, Stewart B. Reed, E. Herbert Burk, Daniel J.
Mitchell and Jesse I. Treu.
-----------------------------
*Filed herewith.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated January 31, 2001 regarding the
change of its corporate name to CareCentric, Inc.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARECENTRIC, INC.
Dated: May 15, 2001 By:/s/ Stephen M.Shea
----------------------------------------
STEPHEN M. SHEA
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
22
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 First Amendment to Voting Agreement Regarding Simione Directors
dated as of July 12, 2000 by and among the Company, Mestek, Inc.,
John E. Reed, Stewart B. Reed, E. Herbert Burk, Daniel J.
Mitchell and Jesse I. Treu.
-----------------------------
*Filed herewith.
1359242